International Business in Emerging Markets - Term Paper Example

INTERNATIONAL BUSINESS IN EMERGING MARKETS Table of Contents Virgin markets 4 Cheap resource 4 Benefits from the State Government 5 Financial Assistance 6 Transfer skills and technology 6 Research and Development and Innovation 7 Generating income and employment opportunities 7 Raise productivity and output 7 Enhance exports and contribute to the long-term economic development of developing countries 8 Pries L., (2001), New Transnational Social Spaces, Published by Routledge, ISBN 041523736X, 9780415237369, retrieved November 23, 2008, from http://books.google.co.in/books?hl=en&id=KAZ_zu2wMIkC&dq=transnat%C4%B1onal+companies&printsec=frontcover&source=web&ots=lV8N8pANJ8&sig=a1DiajRYqX7YsKZyirwPNvaGaNc&sa=X&oi=book_result&resnum=5&ct=result#PPR6,M1 11 Instructions: When transnational companies purchase or form alliances with state owned enterprises in developing countries, they not only increase their own access to countries that offer potentially lucrative markets and advantageous locations for manufacturing and distribution, but they also help governments achieve their goals. Introduction: In this age of free trade and globalization, international business has evolved to occupy a very significant position in world economics. Transnational is a contemporary term synonymous to multi-national companies. Broadly speaking these transnational companies run their business in different countries of the world and plays a major role in controlling the economic assets of those countries by owning equity capital stake. Transnational companies are characterized by their enormous financial resources, vast technical resources and extensive global reach. They evolved in the late 19th century as a consequence of changing environmental forces and rising demand for global efficiency, national responsiveness and worldwide learning. (Pries L., 2001) To get a clear picture, the organizational characteristics can be divided into three broad heads viz., configuration of assets and capabilities, role of overseas operations and development and diffusion of knowledge. TNCs or MNCs have their operations decentralized and are nationally self-sufficient. The top executives of these companies keep a keen eye on the various economies of the world and takes timely initiatives to exploit opportunities. Knowledge is developed and retained within each unit but technology is brought from the center. Though international companies can better leverage the knowledge and capabilities of the parent company, cost intensive resource configuration and operating systems make it less viable in the totality. Transnational companies work on a broader perspective of business and over time has redefined the way the world conducts business. It strives to achieve global competitiveness and international flexibility in business. (Bartlett C.A. and Ghoshal S., 1998) Transnational companies recognize workforce efficiency and innovation as two very important parameters fro achieving global competitiveness. As such while certain resources are best centralized within the parent company operation, some others are decentralized. Centralization is not necessarily at home. Products that are primarily labour intensive might have their production plants built in low wage countries like Singapore and Mexico. Such flexible arrangements complement the benefits of economies of scale; helps lower the cost of inputs and also provide ready access to scarce resources. Decentralization, on a local-for-local basis, also helps reap potential economies of scale and protect against exchange rate shift. (Bartlett C.A. and Ghoshal S., 1998) Advantages of doing business in developing countries The transnational companies provide the largest financial source to the developing economies of the world. In the year 2002, if statistics are to be believed as much as $162 billion of foreign direct investment went to the developing countries. These transnational companies are not development or welfare agency. The sole motive behind their carrying out business in developing economies is profit-making. Though there have been many debates on the role of these companies in a not so developed country, this report will highlight their dual roles of funding source and making profit. The total number of transnational companies can be estimated to be something around 65,000 and their top investment destinations are South Africa, China, India, Brazil, Mexico, Poland and Russia. The propelling factor behind the rise of TNCs is globalization. Worldwide removal of trade barriers has helped these companies to venture into the virgin markets of the developing economies. (Skynriver, August 2006) Virgin markets As a result of steady economic progress, the developing economies experience rising per capita income and standard of living. Primarily catered by local players, these transnational companies can sweep away competition within a short span of time. The transnational companies provide better quality products owing to its superior technology base, financial resources and innovative measures. The consumers get to avail world class products at the local shops and at competitive prices. Proven expertise in manufacturing, operations, resource allocation, work force management and research and development gives than edge over the local manufacturers. The different TNCs compete to be the first one to enter these economies. It takes sometime to build a brand in a new country and the people become familiar and used to one particular brand, it takes even more effort to introduce another brand of the same product in the market and gain consumer confidence. Cheap resource As a strategic business move companies shift their manufacturing plants to countries where it is cost efficient to produce in bulk. For producing labour intensive products companies often shift their production base to countries of Asia and Africa where labour is cheap. Companies like Unilever, Procter & Gamble and IBM rule the economies of comparatively less developed and developing economies. They entered the markets at the right time and by sensing and then responding to the local needs gained monopoly rights over different commodities and services. IBM India at present has the largest employee head-count. This is possible because labour is cheap in India. IBM GBS India primarily operates in the cost recovery mode and it is considered to contribute approximately $1 billion per annum. Within a few years of its entry, IBM became the biggest amongst all Indian IT companies. Benefits from the State Government These transnational companies get multiple benefits from the State governments for operating in these economies. Right from tax reduction and waiver to income tax benefits they get all sort of assistance from the Governments to run business in their economies. (Perspective on Transnational Companies, n.d.) Symbiotic relation between the State Governments and the transnational companies Small and developing countries are overprotective about their economies and are anxious about big corporate houses coming into it. In the nascent stages the economies are extremely vulnerable and risk prone. Too much of liberalization might end up in some international power taking control of the entire economy. History upholds that in the name of trade many big nations entered small economies and later colonized them. As such liberalization and free trade though has become the order of the day, yet Governments of these economies are mostly apprehensive about such decisions. The primary aim of a Government is to maximize the welfare of its citizens. These big transnational companies pose a major threat to the domestic industry and damage the fast growing infant industries. Many a times it also happens that these companies leave the countries mid-way due to various reasons leading to large scale unemployment and crisis. Sony Corporation withdrew its operations from West Java, Indonesia because of poor business climate. An Anglo-American mining company withdrew its copper investments from Zambia as part of a restructuring. Despite all these hair raising stories of how one decision of the transnational companies can break a relatively small economy, business continues to happen day in and day out. The brighter side of the story helps state Governments overcome the fear and actively celebrate liberalization. When transnational companies purchase or form alliances with state owned enterprises in developing countries, they not only increase their own access to countries that offer potentially lucrative markets and advantageous locations for manufacturing and distribution, but they also help governments achieve their goals. There is a mutual benefiting relationship between both the State Governments and the transnational companies. The various benefits can be outlined as follows: Financial Assistance One of the major limitations to growth for the developing economies is limited financial resources. They lag behind primarily because of monetary constraint. Governments of these economies promote investments through appropriate financial and tax incentives. The core reason for encouraging liberalization, free trade and alliances is unavailability of credit within these economies. Transnational companies provide the much needed financial assistance to these economies. Transfer skills and technology Despite having the best of natural resources due to lack of funds and technology these resources cannot be exploited to their fullest capacity. However right from the domestic industry leaders to the Government everyone realizes how important a role technology plays in the development of an industry and thus the nation. This is where it helps to encourage foreign investment. The transnational and multi-national companies enter these developing economies to reap the benefits of increasing demand and income patterns and in turn bring with them their advanced technology. (Mayer J., August 2000) In the developing countries there exists a huge gap between current reality and preferred future and thus the challenges for knowledge and skills development are significant and substantial. Transnational companies help bring the future closer by bridging this gap. (Hargreaves A. and Shaw P., n.d.) Research and Development and Innovation Innovation and fruitful research and development activities are important for any economy to scale growth and be in the race. However due to lack of funds with these countries, neither the Government nor the different industries can invest in such programs. As such the Governments of the developing economies encourage innovation through financial and non-financial measures including protection of IP, provision of tax waivers, income tax benefits on R&D, tech transfers, and tech consulting, data protection for business processing, etc. Generating income and employment opportunities Less developed countries are characterized by large scale unemployment and poverty. When transnational companies set up manufacturing units or offices in developing economies it enormously helps in creating employment and income opportunities. It serves their purpose because they get labour at cheap rate and also the nation’s purpose. Setting up of a single firm creates gainful employment in multiple domains of work. For example IBM India had 4,900 employees in the year 2002 and this count went up to 74,000 in another 5 years time. That is the kind of growth these transnational companies aim at. Unilever Asia dominates the entire consumer goods industry. Raise productivity and output Though the less developed economies lack the financial strength yet they mostly have extremely talented and skilled labour. The transnational economies with their advanced work process and technologies best leverage their skills. With increased investment, innovation, research and development, use of modern equipments and advanced technology and skilled labour, there is a marked improvement in the production process and overall quality of the products. As a result of increased efficiency and productivity, the national output of services and goods also increases. Since production takes place in the developing nations and employs locals, the revenue generated floats in the inside the economy and adds to the country’s annual GDP. Enhance exports and contribute to the long-term economic development of developing countries Transnational companies contribute to the long term development of the small economies. Carrying out production in the less developed countries helps them to cut down the cost of production drastically resulting in greater revenue by exporting them to developed nations. Companies profit from the difference in exchange rates and the domestic government benefits from the export duties. Consumers of the developing economies get to enjoy good quality and superior products. These companies make sure that a product is designed to be globally competitive, and is differentiated and adapted by local subsidiaries to meet local market demands. As a result the standard of living improves and there is also rise in the overall well-being of the people. Conclusion A few decades ago developing nations would shut their ears at the mention of multi-national and international companies. Over times have changed and they are much regarded as guardian angel. However it was only in the last two decades that transnational companies crept into the veins of world economics and global business. The developing economies in today’s time are fighting it hard to attract more and more transnational companies into the economy. These economies are fast shedding their protective shells and go to great lengths in providing the most lucrative incentives to these foreign investors. The world economy is integrating speedily and the transnational and multi-national companies play a major role in supplementing the development efforts of the small and developing economies. (Abhimanyu, August 2001) References: Abhimanyu, (August, 2001), MNCs in the New World -- How Much Do Developing Countries Gain?, Business Line, retrieved November 23, 2008, from http://www.hinduonnet.com/businessline/2001/08/03/stories/040320ju.htm Bartlett C.A. and Ghoshal S., (1998), Managing Across Borders: The Transnational Solution, Published by Harvard Business Press, ISBN 0875848494, 9780875848495, retrieved November 23, 2008, from http://books.google.co.in/books?id=iyzmBOxGScIC&pg=PA68&lpg=PA68&dq=transnat%C4%B1onal+companies&source=web&ots=lVOdXfH0wB&sig=h8G6irXWJ1H6CZ6zVsyK9QhsFVU&hl=en&sa=X&oi=book_result&resnum=8&ct=result Hargreaves A. and Shaw P., (No Date), Knowledge and Skill Development in Developing and Transitional Economies, An analysis of World Bank/DfID Knowledge and Skills for the Modern Economy Project, retrieved November 23, 2008, from http://siteresources.worldbank.org/EDUCATION/Resources/278200-1126210664195/1636971-1126210694253/DFID_WB_KS_FinalReport_7-31-06.pdf Mayer J., (August 2000), Globalization, Technology Transfer and Skill Accumulation In Low-Income Countries, retrieved November 23, 2008, from http://www.unctad.org/en/docs//dp_150.en.pdf Perspective on Transnational Companies, (No Date), CSIDS-Strategies for Development, retrieved November 23, 2008, from http://www.grips.ac.jp/csids/perspectives/perspective03.pdf Pries L., (2001), New Transnational Social Spaces, Published by Routledge, ISBN 041523736X, 9780415237369, retrieved November 23, 2008, from http://books.google.co.in/books?hl=en&id=KAZ_zu2wMIkC&dq=transnat%C4%B1onal+companies&printsec=frontcover&source=web&ots=lV8N8pANJ8&sig=a1DiajRYqX7YsKZyirwPNvaGaNc&sa=X&oi=book_result&resnum=5&ct=result#PPR6,M1 Skynriver, (August 2006), Can FDI of MNC in developing countries ever be justify?, retrieved November 23, 2008, from http://boards.youthnoise.com/eve/forums/a/tpc/f/58410584663/m/70210822 Read More